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Moody’s points out that bank loans typically offer investors a safe haven when a company defaults on its debt. Layers of subordinated debt absorb losses first, cushioning investors in bank loans.

However, bank-only deals constituted a majority of leveraged financings in recent years, Moody’s notes. “Combined with a potential sharp rise in corporate defaults, that could leave many investors exposed to losses they never expected,” the rating firm says.

First-time debt issuers embraced the loan-only structure in 2004, according to Moody’s. At the time, banks were anxious to extend funding to these new entrants in the debt market.

In 2007, more than 70 percent of new issuers rated by Moody’s came to the market with loan-only deals, valued at about $140 billion in the aggregate.

But now, about 60 percent of U.S. issuers that have rated loans — and one-third of U.S. speculative-grade issuers — have loan-only capital structures.

Traditionally, most companies had debt structures containing a mix of bank debt and unsecured bonds, Moody’s explains. The bonds served as a cushion to the bank debt and took the first loss in case of default.

But in all-loan capital structures, the debt issuance is concentrated in the top seniority level, and there are no subordinate classes of debt.

Moody’s analyzed more than 4,000 loans and bonds that defaulted between 1987 and 2008, and the recovery rates at each tier of the capital structure, with loans realizing the highest rates of recovery (80.7 percent). They were followed by senior secured bonds (63.7 percent), senior unsecured bonds (48.9 percent), and subordinated debt (28.7 percent).

Moody’s explains that the prevalence of loan-only structures in recent years has introduced a degree of exposure to losses that investors in bank loans haven’t faced before.

It notes that loan-only issuers that have defaulted have experienced recovery rates of 60 percent on average, according to an analysis of 68 companies with bank-debt-only structures that defaulted during the last 20 years. “This structural issue sets the stage for a wave of lower-than-average bank loan recoveries as the corporate default rate rises again,” Moody’s adds.